Sterling Falls to a Six Week Low Interest Rates Might Rise

We continue our daily look at factors affecting currencies allowing some insight into market conditions affecting exchange rates. Cash and income timing for UK Pensions and QROPS should be considered to maximise the Pension, QROPS and investment income and benefits taken.


Investment market volatility and currency exchange remains a challenge. Things are still very volatile and we are in unique global influencing territory. In conjunction with investment returns, currency exchange continues to concern many expats with UK Pensions, QROPS and now QNUPS.





Sterling should not have bothered showing up on Wednesday, as it fell to a six week low against a host of currencies. The market made its judgement after the Bank of England minutes showed policymakers forecasting a weaker outlook on growth and not ruling out the need for further stimulus. Investors were of the same opinion that the resulting commentary was more dovish than expected. The newly joined member, former Goldman Sachs economist Ben Broadbent, voted in favour of leaving interest rates unchanged giving a seven-to-two majority. This saw a change with the voting record as his predecessor, Andrew


Sentence, had been backing a half-point rate rise since February. Rates have remained at a record low for twenty seven months and Chris Williamson, chief economist at Markit said the minutes suggested they would stay at 0.5%, with any change more likely to be a further round of quantitative easing than a rate rise.





"Together with the more dovish composition of the MPC, this suggests the chances of interest rates rising this year have decreased and the chance of additional stimulus have risen," he said. Despite the majority voting to leave rates on hold, the minutes also showed that the worry of the rise in inflation was also in the forefront of the meeting. Official figures showed that consumer price inflation in May remained more than double the 2% target rate, at 4.5%. Committee members conceded that it remained likely that it would continue to rise, probably above 5%, before falling back again.





"It is clear that the Bank of England is not going to be raising rates any time soon and it’s no surprise sterling is weakening," said a currency strategist at nabCapital. The minutes cited some factors outside of the UK in influencing their decision-making. The MPC pointed out that there was evidence of a slowdown in the global economy, contributed


to a degree by the tsunami in Japan, which would affect the UK’s recovery.





The Euro joined in the anti-Pound party as it enjoyed some decent gains in the run up to the Greek confidence vote. However, it failed to find significant momentum after George Papandreou, the Greek prime minister, survived his test in parliament. The news increased the chances that the Greek government would be able to push through austerity measures in an emergency budget, a necessity for obtaining €12bn of emergency funding. A deadline of July 2nd has been set by European finance ministers for them to implement such measures. Eurozone policymakers still have not agreed on the scope and the scale of a new Greek aid package and failed to resolve the issue of whether private sector investors should participate in any form of restructuring. Overall most investors are positive in their beliefs that European policymakers will come up with a solution for Greece and will not allow it to fail.





Across the pond, all eyes were focused on Ben Bernanke’s news conference and the resulting comments on the slowing U.S. economy. According to some, the Fed may cut the growth target to 2.7%, down from an earlier forecast of 3.1%. The key factors


behind such a reduction are the poor data releases in the employment and housing sector. Some market watchers expect the Fed announcement to put pressure on the USD in the near term. This could come off the back of a decision to let the second round of QE to finish at the end of June (as scheduled) and the market looks to have already priced this in.





IN THE UK





• Minutes from the Bank of England’s June meeting came in more dovish than expected.


• GBP/USD drops to a low of 1.6091, on a day that sees Sterling fall against all major currencies.


• Ben Broadbent (replacing Andrew Sentence) votes giving a 7-2 majority in keeping rates on hold.


• Some BoE policymakers see chance of more QE if the UK economy continues to falter.





ELSEWHERE





• Euro could be set to test the 90 pence level against a struggling pound.


• Market sentiment sways towards the fact that EU policymakers will come through for Greece.


• Positive data from April’s Housing Price index in the States help the USD hold firm against both the EUR & GBP.


• FOMC meeting shows interest rates remain on hold in the States.


• Yesterday evening the press conference following the FOMC meeting reveals that the $600 asset buying programme QE2 finishes this month, there was no mention starting an additional bout of buying so for now, QE3 is off the radar causing the dollar to rally


• Bernanke said interest rates would remain low to help spur a struggling economy. Recovery appears to proceeding at a moderate pace but growth forecasts have been reduced and unemployment is expected to fall "very painfully slowly"


• Dollars post gains against the majors EUR/USD falls from over 1.44 to drop to a low of 1.4250, GBP/USD falls this morning to 1.6010


• Eurozone PMI Manufacturing and Services figures both released this morning below consensus, whilst the individual German figure for Services climbed to 58.3





DATA TO LOOK OUT FOR





• This morning the BBA issues the number of UK mortgage approvals in May, a slight improvement to 30.0k is expected


• 11.00am CBI distributive Trades Survey is released, the figure is expected to fall to 12


• Initial and Continuing Jobless Claims is released at 1.30 in the US, the numbers are likely to remain on par with last month


• New Homes Sales for May are published at 3.00pm. Consensus is for a fairly significant fall in May


• ECB Trichet’s Speech at 16.00 GMT.








Gerard Associates Ltd advises expats and people considering living abroad on the technical and currency options available for Pensions, QROPS, QNUPS and investments in a clear format allowing all customers to make an informed choice. Our service encompasses Pensions, investments, currency exchange and guidance on taxation in most popular ‘sunnier’ climates. This with the re-assurance and security of UK authorised and regulated advice – essential tools for your security.








Russel Mori writes for Gerard Associates LTD, for more information on


QROPS, QROPS Pensions, QROPS List, QROPS Providers, QROPS Guernsey info available online.